Getting a higher education is one of the most important investments students can make for themselves, and it is best way to ensure a strong middle class. Since the start of the Obama Administration, the U.S. Department of Education has worked to make college more affordable and increase college success, including doubling investments in Pell grants and tax credits to help students and their families pay for college, releasing better information on debt and outcomes through the College Scorecard that helps students and families make strong college choices, and allowing borrowers to affordably manage their debt through repayment options like the President’s Pay As You Earn (PAYE) plan, which caps monthly payments at 10 percent of income.
For many students and families, federal Direct Loans are an important resource to help cover the costs of attending college. Accurate and timely loan information can help students make informed decisions about borrowing, and it also helps students understand their rights and responsibilities as borrowers, as well as their options for managing and affordably repaying their loans after college. Despite its importance, there is limited rigorous research on how to make loan counseling more effective, including which types of content and delivery methods are effective in helping students understand and manage their debt, as well as when—and how often—counseling should occur to have the greatest positive impact.
The Department is launching a pilot to test rigorously the effectiveness of more flexible loan counseling policies on federal student loan borrowers. The experiment will allow colleges to require, as a condition of receiving Direct Loan funds, loan counseling to students beyond the statutorily required one-time entrance and one-time exit counseling. The experiment will test whether requiring additional loan counseling is effective in boosting academic outcomes and helping students manage their debt.
“School-based loan counseling creates an important opportunity to help borrowers make more informed decisions about their postsecondary education,” said U.S. Under Secretary of Education, Ted Mitchell. “Selected institutions will help us identify the most effective loan counseling practices and provide invaluable insights about how to prepare borrowers to manage and repay their student loans successfully.” Through this experiment, the Department aims to learn if the loan counseling flexibility:
- Helps students make more informed decisions about borrowing student loans;
- Promotes successful repayment of students loans, including reducing delinquencies and defaults; and
- Has a positive impact on students’ academic performance, such as grades and completion.
The Department is launching this experiment under the experimental sites authority of section 487A(b) of the Higher Education Act, which allows the Department to test the effectiveness of statutory and regulatory flexibility for postsecondary institutions that disburse federal financial aid.
Participating institutions may select one of three loan counseling approaches to implement and evaluate: (1) the Department’s Financial Awareness Counseling Tool, (2) third-party counseling services or tools, or (3) institutionally developed counseling that meets minimum content requirements.
Selected institutions will be able to require a randomly selected group of Direct Loan borrowers to complete additional loan counseling once during each academic year. This group will be compared to a control group of borrowers who will only receive the statutorily required entrance and exit loan counseling to determine the impact of the additional help. The institution may also customize the counseling based on the borrower’s needs, and colleges are encouraged to include information that may assist students in making more informed borrowing decisions, such as the terms and conditions of federal student loans, data showing how college completion can increase students’ ability to repay their loans successfully, earnings information, and details on income-driven repayment plans like PAYE, which can help borrowers manage their debt after they leave school.
Candidates for Participation
To apply, institutions of higher education participating in the federal Direct Loan program must:
Ensure additional loan counseling does not discourage borrowing needed to complete
- Ensure additional loan counseling is reasonable in terms of time, effort and relevance to the student’s borrowing decisions, and does not bias or restrict based on students’ religion, national origin, race, color, sex, socioeconomic status, place of residence, sexual orientation, gender identity, physical enrollment location, or educational program;
- Disclose to all borrowers that the institution is participating in the experiment, and inform participating students of additional loan counseling requirements; and
- Ensure that the institution’s policy for providing counseling under the experiment, and the content of that counseling, remain consistent throughout the institution’s participation in the experiment.
To be considered for participation in this experiment, interested institutions of higher education must submit a letter of interest to the Department of Education, following the procedures outlined in the Federal Register notice, which will be published in the coming days.
Building on Efforts to Help Borrowers Manage Repayment
Better Information for Student Loan Decision-Making
With concerns over college costs and student debt, American families’ choices about finding, selecting, and paying for college have never been so important. The Obama Administration has worked to make more information available to students to help inform their choices. The redesigned College Scorecard, launched in September 2015, includes the most comprehensive, reliable data ever published on students’ employment outcomes and success in repaying student loans. The Financial Aid Shopping Sheet, in use by more than 3,000 institutions, helps to standardize the financial aid award information schools share with students. And recent changes to streamline the Free Application for Federal Student Aid will provide students with the ability to apply for aid sooner, so students and families have a more accurate picture of college costs as they apply for and select their colleges.
Income-Driven Repayment Options
The loan counseling experiment builds on years of work by the Administration to help ease the burden of student loan debt. Four out of every five borrowers are able to repay their student loans successfully, but for many borrowers who are struggling with repayment, income-driven repayment plans can reduce monthly payments and help ensure borrowers manage their debt and avoid the negative consequences of default. Under the President’s PAYE plan and other income-driven repayment options, most borrowers are eligible to cap their monthly loan payments at 10 percent of their income. Borrowers who make their payments on time under PAYE will have their debts forgiven after 20 years (10 years for borrowers who have dedicated their careers to public service, such as teachers and nurses). More than 5 million Direct Loan borrowers are now enrolled in income-driven repayment plans, up from 200,000 in 2011. To help borrowers easily navigate student loan repayment options, the Obama Administration recently launched StudentLoans.gov/Repay which helps students find their best repayment option in five steps or fewer.
White House Student Loan Debt Challenge
The loan counseling pilot builds on the Administration’s partnerships with colleges, universities, non-profits, businesses, state and local governments, and other employers to help more borrowers understand their repayment options. In April 2016, the White House announced the Student Debt Challenge, launched with more than 40 organizations committed to help inform their communities about repayment plans and steps to enroll so they can manage their monthly payments and avoid delinquency and default.